Same Parliament, same Cabinet, different mood

..editorial……Parliament has now resumed with the same Cabinet, the same 400 MPs, the same ANC Alliance majority instructed whips and the same names in the party benches but the ambiance is very different. This subtle fact, however, matters little in the immediate future. Legislation before the National Assembly (NA) will still be subject to a simple numbers game when it comes to voting. Well, almost.

In the case of a Section 76 Bill, that is a Bill that needs not merely the concurrence of that portion of the 400 MPs that sit in the NCOP but subject to full debate by all nine provinces and a mandate returned in favour or not, there might be the beginnings of healthier opposition. Power at local level has been emboldened since Parliament last met.

So far, matters of consequence have been that the Department of Energy has presented its REIPPP plan with support from most other than Eskom with no Minister present and the Mineral Resources Portfolio Committee has re-endorsed a revised Minerals and Petroleum Resources Development Amendment Bill for process by the NCOP using its ANC majority. Again no Minister was present. Eskom will be presenting on this and matters regarding coal any day.

Old tricks

However, presuming the picture in Parliament stays as it is until the 2019 national election with Jacob Gedleyihlekisa Zuma at the helm as President, it will be interesting to see what type and how much legislation is hammered through the NA by the ANC using the same old tactic of deploying party whips with threats of being moved down on the party list system for a total majority, timed last year in a rush just before a recess.

Notably, now in the case of three Bills sent for assent after being voted through, the three were not signed by President Zuma into law acting on legal advice.

With this trio now back with Parliament on the grounds of either suspected unconstitutionality and/or incorrect parliamentary procedure, the issue is now whether the coterie of Cabinet Ministers that surround the President, with Director Generals appointed by and who report to those Ministers, will take Parliament more seriously.

Not hearing

Good advice is not good advice when it comes in the form of a last minute warning not to put signature to any Bill thereby turning it into an Act of law. Plenty of such advice not do this in respect of a number of Bills was previously given during parliamentary portfolio committee debate, at parliamentary public hearings from affected institutions, business and industry and even earlier in public comment when the Bills were first published by gazette in draft form.

Similarly, the lesson seems not to be learnt in higher echelons that the independent regulatory entities are also not to be ignored – institutions from the Office of the Public Prosecutor to ICASA, from NERSA through to the board of the Central Energy Fund and from National Treasury to international courts, the UN and international bodies protecting human rights. Parliament is due to hear from ICASA any moment.

Most worrying, however, are the attempts to by-pass Treasury when presenting policy to Parliament. Ideological bullying can bankrupt a country in no time.

Such issues as Minister Aaron Motsoaledi’s National Health Insurance dream and Minister Joemat-Pettersson/President Jacob’s Zuma’s dream of six nuclear energy reactors – plans that the country should not possibly not countenance from a financial aspect – have neither been presented to Parliament in the proper national budget planning form or officially and financially endorsed.

Missing money details

Minister of Health, Aaron Motsoaledi, has gone as far as a White Paper to Parliament on the NHI and Minister Joemat-Pettersson has briefed Parliament on nuclear tendering. Treasury have said nothing about a financial plan in each case. Money is short, as evidenced by Treasury stepping in on the provisions for BEE preferential procurement. Somewhere there is a disconnect.

As for President Zuma’s continued pressure to bring traditional leaders into the equation with what amounts to two separate judicial systems and has even talked of the equivalent of four tiers of government – one therefore not even reporting to Parliament and certainly no idea of local government and nor subject to the PMFA has its problems. President Zuma has used his ally, the Minister of Justice, to table the Traditional Courts Bill before Parliament. Opposition parties will walk out on that one, we are sure.

The Speaker of the House, Baleka Mbete, as part of the same coterie, has made a mild signal that the days of Cabinet maverick behaviour, even arrogance, towards Parliament and no respect for the separation of powers may be coming to an end. The SACP is clearly not happy. That is where the new ambiance felt in an unchanged Parliament may play an unofficial part and pressure may start building.

DoE gives update on SA nuclear plan….

The Department of Energy (DoE) says it is the sole procurer in any nuclear programme and that “vendor parades” had been conducted with eights countries, the results to be announced before the end of 2015. To give cost details, they said, would “undermine the bidding process”.

The situation regarding South Africa’s current intended nuclear energy programme was explained during a parliamentary meeting of the Portfolio Committee on Energy, DoE confirming that a stage had been reached where nuclear vendors had been approached and DoE staff were being trained in Russia and China.

Eskom not involved

Neither DoE, nor the Minister of Energy, Tina Joemat-Pettersson, who was also present would give cost estimates nor speak to the subject of financing other than the fact the minister admitted that the idea of Eskom being involved in the building programme in the style of Medupi and Kusile was a non-starter.

At the same time Minister Joemat-Pettersson announced that a new Bill, the Energy Regulator Amendment Bill, was to be tabled that would give Eskom the right to appeal against tariffs set by the National Energy Regulator (NERSA). This followed upon the news that Eskom would be given powers to procure, which must lead to the assumption, said opposition MPs later, that Eskom will recoup costs of financing through electricity tariffs.

The Minister said the renewable IPP programme involving the private sector had included multinationals and had been “hailed as a success” and the deal that would be struck with nuclear vendors would be on best price in terms of the end price for the consumer. Any bidding would be conducted in the “style of the IPP process”, which included support of the process of black procurement and skills training.

Contribution to grid still “theoretical”

Deputy Director, Nuclear, DoE, Zizamele Mbambo, explained to opposition members that whilst government had in principle decided to include nuclear energy in the energy mix for the future, DoE itself was still only at the stage of establishing all costs involved to the point of actual connection of a theorised figure of nearly 10GW to the national grid. To disclose costs at this stage would undermine the bidding process, he said.

The main purpose of the costing exercise still remained the final cost the consumer, he said, in terms of the NDP Plan 2030, a phased decision-making approach over a period of assessment having been endorsed by the Cabinet in 2012. The whole exercise of deciding what the costs would be was therefore relevant to how much coal sourced power would contribute to the baseload of the energy mix by 2030.

Deal or no deal

Zizamele Mbambo confirmed that in 2013, DoE had been designated as the sole procurer of the nuclear build programme and “vendor parades” had been conducted with Russia, China, France, China, USA, South Korea, Japan and Canada. The strategic partner to conduct the next stage, the New Build Programme itself, would be announced before the end of 2015, Mbambo said, by which time costs would have been established and treasury consulted.

At this stage no deal had been struck, he confirmed.

As distinct from the actual vendors per se, and any deals, Mbambo said that international agreements had been struck with interested counties on the exchange of nuclear knowledge, training and procurement generally.

DoE trainees already in China

“Fifty trainees already employed in South Africa’s nuclear industry had already gone to China for ‘phase one’ training with openings for a further 250 to follow”, he said, noting that the Russian Federation had offered five masters degrees in nuclear technology.

The New Build nuclear programme was at present based on providing eventually 10GW of power to the grid but DoE confirmed that the indirect effect on the economy from “low cost, reliable baseload electricity is logically positive but difficult to assess”.

Zizamele Mbambo showed a graph of the possible integration of energy from coal, nuclear, hydro (imported), gas and renewables over a period, stating that nuclear was clean, reliable and would ensure security of supply with “dispatchable power.”

Opposition Members complained that the process seemed likely to make the price of electricity unaffordable to the poor and have a major impact on the cost of doing business in South Africa.

Nuclear vs. coal

Mbambo was at pains to explain that in the long term, the cost of nuclear energy was considerably less than coal and this was the reason that, for future generations, South Africa had to embark on a course that not only lead to cleaner but cheaper energy.

As a final issue, DDG Mbambo touched upon the question of approval by the International Atomic Energy Agency (IAEA) and explained that any relationship with this UN body was on the basis of a peer review.

This covered nineteen issues from nuclear safety management to radioactive waste disposal and was not an audit, he explained, South Africa already having been an experienced nation in nuclear matters from medical isotopes to nuclear weapons. It was pointed out to members that that IAEA merely carried out reviews and made input.

Up to speed or not

It was during the response to the budget vote speech on the subject of the IAEA, that Opposition Shadow Energy Minister, Gordon Mackay said that the agency had found South Africa deficient in more than 40% of its assessment criteria. In response, DDG Mbambo did not refer to the current state of the country’s nuclear readiness at any point but confirmed there was a great need for training and this was now the emphasis.

He said the relationship with the IAEA was in three phases covering purchasing, construction and operations and although it was thirty years since South Africa had a nuclear building programme at Koeberg, the current contribution to nuclear technology was recognised. The programme now was to create a younger generation of nuclear experts, the main issue being to build technology capacity and train trainers in the state nuclear sector.

Reactor numbers

Mbambo concluded his presentation by stating that DoE was in discussion with treasury specifically on this issue of funding training, Minister Joemat-Pettersson adding that some six to eight reactors were planned but a this was very early, the weight that “price” would carry in determining a strategic partner was not decided.

Other articles in this category or as backgroundNuclear goes ahead: maybe “strategic partner” – ParlyReportSA National nuclear control centre now in place – ParlyReportSA Energy plan assumptions on nuclear build out in New Year – ParlyReport

The Gas Amendment Bill was about to be tabled in Parliament as part of the overhaul of the Gas Act, energy minister, Dipuo Peters, confirmed in her budget vote speech, the draft of the Bill having been approved by cabinet in April of this year and published for comment in June. According to a media statement by department of energy (DoE) on the draft Bill, certain omissions in the Gas Act of 2001 are addressed such as inadequate powers conferred on NERSA, the need for speedier licensing and clarity on pricing and tariffs. Stakeholders from industry have been involved.

Much of the new Bill according to DoE in the energy presentations to Parliament will reduce the risk of South Africa having an “underdeveloped natural gas sector” with consequent implications to the security of energy supply.

Transportation addressed

Attention in the draft Bill is paid to unconventional gases not included in the original Act, along with technologies for transporting natural gas in liquid and compressed form. The new draft Bill also clarifies NERSA’s functions in the many processes and stages that involve gas between exploration to sale in containers, including storage.

During the ministers recent briefing, the attention of the media for assistance in promoting LP gas as a safe alternative to electricity.

The many re-definitions included in the draft reflect the changing nature of gas exploration in South African waters; the possibility of gas reticulation; the changing nature of gas storage and complexities of LP gas consumer issues.

Sasol big player

In piped gas, Phindile Nzimande, CEO of NERSA recently told parliamentarians that the maximum prices for such were dealt with in regard to Sasol, this being the last year of the “maximum price” arrangement. In petroleum pipelines, the Transnet annual increase was set at 8.53%, again with much controversy, and decisions were made on 60 storage and loading facilities.

There was still a major lack of credible gas anchor clients in piped gas, Nzimande said, nor was there an established and regular supply chain and serious competition, resulting in high prices for the poor. NERSA had much work to do in this area, she said, as far as compliance monitoring and enforcement was concerned.

The following articles are archived on this subject:http://parlyreportsa.co.za//uncategorized/more-hints-that-gas-act-amendments-on-the-way/ http://parlyreportsa.co.za//energy/south-africa-at-energy-crossroadsdoe-speaks-out/

Eskom in poll position…

Clarification of South Africa’s intentions towards the inclusion of nuclear energy as an integral part of the national energy mix have now been made quite clear, South Africa’s nuclear team possibly working with a “strategic partner” but with Eskom in poll position.

Strong messages that this was the case have been emerging from parliamentary presentations by both the department of energy and public enterprises over the last few weeks but now the die is set.

Minister spells it out

It needed the confirmation of the minister of energy, Ms Dipuo Peters, to tie the knot as she did in a media briefing following her budget vote speech in Parliament. She confirmed that the nuclear build programme will add 9 600 megawatts to the national grid by 2023 and a form of consortium would be reached whereby Eskom would have the designation as owner and operator, the national nuclear energy executive (NNEECC) to ensure oversight and be responsible for key decisions.

The final investment decisions towards procurement of plant would now be made, she said, Neliswe Magubane responding to media questions that having Eskom on board might deter potential partners to the effect that this could not be the case. She could not see how suppliers were interested in operating factors, although NNEECC could well draw in a “strategic partner” to bring further expertise to the table.

Eskom looking a massive loans

With Eskom now facing capital expansion projects separately detailed by them in the recent NEMA-Air Quality emissions hearings and also as a result of a “New Build” nuclear development programme that involves it seems at least six nuclear plants, NERSA in a separate parliamentary meeting in recent days, admitted that it was difficult to see how eventually all of this could fail to translate down into yet further electricity price hikes.

Air quality a deciding factor

Both minister Gigaba of public enterprises and minister Peters of energy have both brought the added fact of reduced emissions of CO2 as a major factor in the decision making in what appears to be a co-ordinated approach. The main issue remaining is therefore the time delay in bringing the nuclear contribution online to the grid.

From questioning it became evident that Eskom may have to reconsider bringing forward one its coal fired plants as far as completion dates are concerned.The following articles are archived on this subject:

Unlicensed pipeline operations a problem….

Commenting that the petroleum and gas industry did not seem to take licensing particularly seriously but the electricity industry did, Phindile Nzimande, CEO of the National Energy Regulator (NERSA), gave a characteristically outspoken report to the parliamentary committee on energy on NERSA’s strategic and plan until 2016.

She noted that NERSA had investigated sixty seven suspected unlicensed activities in petroleum pipeline activity, only four of which were found to not require a licence. Thirteen petroleum storage licences were revoked.

NERSA not changing plans

Nzimande said that NERSA found no reason to alter their five-year plan as originally submitted in 2012 and NERSA would continue with its mandate of transparency, neutrality, predictability and independence. It has been a busy year, she said, not the least of which was the extraordinary amount of work generated by Eskom tariff application, the national hearings process and the time involved in decision making.

In the area of electricity generally, 183 municipal and private distributor tariffs were given approval and 47 energy generation licences granted. 9 distribution licences for connection facilities between Eskom and an independent power producer (IPP) were also granted.

Sasol back to listed tariff next year

In piped gas, Nzimande told parliamentarians that the maximum prices for such were dealt with in regard to Sasol, this being the last year of the “maximum price” arrangement. In petroleum pipelines, the Transnet annual increase was set at 8.53%, again with much controversy, and decisions were made on 60 storage and loading facilities.

There was still a major lack of credible gas anchor clients in piped gas, Nzimande said, nor was there an established and regular supply chain and serious competition, resulting in high prices for the poor. NERSA had much work to do in this area, she said, as far as compliance monitoring and enforcement was concerned.

Costly multi-product line

In the area of petroleum pipelines, Nzimande said the “prudency” investigation into the cost of the multi product Durban/Gauteng pipeline was a major undertaking and NERSA was also involved with Transnet on the issue of high port charges which had become a national issue.
The security of supply of petroleum to inland areas was also a matter of deep concern, Nzimande said, and NERSA was “working with stakeholders”. When asked how NERSA was monitoring this she said the matter was very much up to the investors concerned but she was aware that department of energy “was grappling with the issue” and NERSA was closely following the matter which had to be taken in to consideration on pricing matters.

Local government problems

On tariffs generally, Nzimande said a major issue facing NERSA was the legal issue of regulatory relationships with municipalities and their powers in respect of enforcing licensing and pricing structures. This was to be resolved shortly.

When asked if Eskom would be allowed to re-visit the issue of their tariff structure finally allowed and appeal, Nzimande said that she could not say that that such a move could be excluded as a legal part of the multi-year price determination process. The chair excused her for answering questions on the Alstrom and Hitachi legal wrangle on the Medupi power plant currently under construction by Eskom but she acknowledged that NERSA was aware of Eskom’s problems and financing issues.

NERSA and NNER?

When asked why NERSA and the structures of nuclear regulatory matters were not combined into one regulatory body, Nzimande replied that international agreements and the structure of the nuclear global industry was specific on this issue and required specific nuclear regulators with specific mandates for their own countries to be established. The work and relationships of a nuclear regulatory authority were very different, she said.

She agreed with complaints regarding difficulties in the petroleum storage area and confirmed that the regulations may have to be re-written in this regard. She was specific that NERSA would look into the issue of tariffs for storage, since one member complained that the current high cost structures could well be acting as a disincentive to investment.

NERSA to review Transnet’s progress…

engineering news

In commenting on NERSA’s decision not to allow Transnet’s application for a 22.6% increase but instead hold this back to 8.5%, Dr Rob Crompton as pipeline regulator was starting a “prudency” review of the Durban/Gauteng fuel pipeline project in view of the fact that it was three years behind.

It was unlikely to catch up and costs had escalated from an original R9.5bn in 2005 (at the last count in 2010) to R23.4bn. The the overrun was now into unknown realms, he said.

Whilst Transnet has a network of 32 pipelines over 3,800km, the current new multi-product pipeline, or NMPP, has been giving headaches for some considerable time mainly due to its multifaceted product pumping nature. NERSA said that they were using the word “prudent” because they did not wish to jump to conclusions or make any assessments themselves until the project was complete. The minister of public enterprises has called for an investigation into the escalating costs, meanwhile.

Pipeline volumes declining

It was notable NERSA, as a whole, has to bear in mind that in the case of the Transnet application for a tariff increase the application was for one year only not multi-year. The worrying factor to NERSA, Rob Crompton said, was that volumes carried on the pipeline were declining – a lot of which was due to the fact that whilst some six grades of petrol, two diesel and also biofuels were carried, there also came a major complication with high and low sulphur content diesel where special tanks and road haulage had to be used.

As an outsider, Dr Crompton said that NERSA could see that Transnet had been asked to quadruple its assets but there had been no injection of capital with the result that Transnet seemed to be building on a “pay as you go “ principle, raising capital where necessary. This was far from satisfactory, he said.

Dr Crompton noted that no further help had been mentioned in the 2013 Budget speech

Fuel price structure complicated

NERSA said that of the nearly thirty items that went to make up the petrol price structure in South Africa, from road accident funding to wholesale margins, only about 16% of the price came in “administered prices” and NERSA, in establishing their views, had only studied one element of this.

He said that in studying Transnet’s application and finally setting a much lower figure, a balance had to be found between the principle adopted of “user pays”, in other words the motorist, and Transnet being able to “claw back” unspent sums or altering over-charged budgets.

Storage nearly finished

It was noted, however, that Transnet forecast a 4.6% increase in volumes in 2013/14 and that the tank storage projects at either end of the line should be finished shortly.

NERSA said it was trying to work with the department of energy to get consistent regulations on the whole, or at least a lot more parts, of the entire cost structure but it was unlikely as things stood whether pipeline tariffs would become “multi-year” to assist in longer term planning from what could be seen.

Parliamentarians were complimentary to the NERSA staff on their diligence and producing a result which had helped the consumer in difficult times.

SONA and Budget 2013/4 beat the pundits…

With budget behind us, the script for the state of nation address (SONA) becomes a little clearer.

At the time SONA wasn’t what was expected and represented to many a total let down insofar as direction, information and inspiration was concerned. President Zuma’s speech was really quite remarkable for the subjects it didn’t touch upon or skirted around. Perhaps that’s what happens when a majority party is half way through its current tenure of office.

In all fairness, however, there is so much that is about to happen in South Africa on infrastructure development and so much “in the pipeline”, that there was little the current government could do other than recycle the list of eighteen major projects that the twenty seven government departments and sixteen utilities having been talking about for months, sometimes years, all of which seem in a pretty embryonic stage. The hope is that when it all comes together, it won’t be too late.

NERSA played a trump card

On energy, little was said – in fact practically nothing at all that was not patently obvious such as the fact that Medupi and Kusile are being built. In fact nothing was said on electricity at all, the reason for which was to become evident in the NERSA decision the following week when Eskom’s multi year price determination call of 16% was toned down to 8%.

Dangerous budget

Also the following week and following SONA came Pravin Gordhan’s budget with its surprising nil increase on income tax, severe budget cuts, the introduction of carbon tax and an increased fuel levy. Once again the National Development Plan was heavily emphasised and perhaps at last government is going to get on with it with a new presidential infrastructure co-ordination commission to support the initiative.

The Budget was in some ways masterful but still frightens the credit rating agencies, with Gordhan trying to balance the books after an increased deficit over the previous year, something the new government used to pride itself on not needing under finance minister Trevor Manuel – but times change and the global recession arrived.

Executive powers

Interesting for Parliament is the introduction of the draft Infrastructure Development Bill giving extraordinarily wide powers to an all-powerful commission to be known as the presidential infrastructure co-ordination commission, as stated above, with all nine premiers, the President and Deputy President steering the ship in an effort to cut red tape and speed things up.

This can only be good, if only for the fact that the captain of the ship can speak alone to the twenty seven departments and sixteen utilities described above.

Public Service too big

Which leads to the issue of a somewhat bloated public service which has had the benefit of above-inflation increases this year, so it was pleasing to see that a skills audit of public servants is about to be commenced amongst the 1.2m public servants, which in a country of only 51m, is totally disproportionate.

Public Service and administration minister Lindiwe Sisulu told Parliament that the increase of 1% per year in salaries has to be turned into a decrease of 1% next year.

Encouragingly also, planning minister Trevor Manuel (who has but ten staff) has clearly indicated that he is relying on the parliamentary oversight system to beef up his programme to wake up to the National Development Plan. How well Parliament scrutinizes the national budget in the coming weeks in every parliamentary portfolio committee demanding both value for money and delivery on time, every time, is now the critical issue.

Barclays credit rating report on Eskom needed…

Ompi Aphane, deputy director general, department of energy (DOE), said that Parliament had two options if it was to debate the Independent Systems and Market Operators (ISMO) Bill and try to move matters forward in order to satisfy the needs of investors and IPP bidders.

He told parliamentarians of the portfolio committee on energy, who had instructed a working group made up of DOE, department of public enterprises and national treasury, to investigate possibilities of separating the transmission grid as a state utility stand alone separated from Eskom,were caused by the fact that the working group had been unable to meet its reporting deadline for reasons that a financial report had to be completed first on the issues facing Eskom’s credit ratings.

Two options on way forward

Aphane said the options facing the energy committee were whether to continue debating the ISMO Bill allowing for the probable licensing of independent power producers (IPPs) on the basis that the parliamentary process could be adapted to the findings of the working group or hold up the ISMO Bill and continue the debate only when the findings of the working group were known, which could be some time yet.

A third option, suggested by opposition MPs, was to consider upfront that Eskom was to lose the assets of the transmission grid; that a new transmission system operator (TSO) was to be established by the state; compensation made to Eskom and debate the Bill as far they could on these assumptions because the matters were so urgent.

The committee is now to consider its options and advise DOE accordingly on the outcome. Meanwhile the DOE working group will continue with its work.

Other considerations

Ompi Aphane said there were a number of areas of public concern which included the independence of the assets transferred from Eskom; the need to incorporate a “willing buyer, willing seller” concept and progress on energy renewables reports currently with NEDLAC.

He told parliamentarians that the vexed area of transferring the assets and the effect this would have on Eskom had been given to Barclays Capital to complete a report to the working group, not yet received. The legal impact was being considered by the Eskom legal team, as were the more secondary issues of human resources and technical impacts.

Issues surrounding the NERSA licence originally issued to Eskom had to be considered insofar as whether this should be re-issued having been revoked or amended. Broad outlines of what the new regulatory transmission body or TSO would look like and the basis of its power purchasing agreements with Eskom had not yet been fully investigated.

Conditions for the new independent supply operator

Most importantly, the new TSO will require “back to back” power supply agreements with customers for its purchased power agreements with Eskom. The transfer of intellectual property and IT supply systems was also a major factor not yet included.

Major issues still surrounded the transfer of land and the situation with regard to land tenure agreements was still a matter for finalisation in general principle. Also, there were issues surrounding the fact that rural customers were often subsidised at the expense of large customers, whilst some large customers had special rates – all of which agreements and considerations had to be taken into the structuring of the new TSO.

Under the TSO modelling plan, Ompi Aphane estimated that the loss where key industrial customers were concerned could amount to R5.6m. He said that “it had been agreed that national treasury would seek to engage with funders to explain the restructuring to mitigate any concerns on Eskom finances, so that debt providers were comfortable”.

NEDLAC ready on renewables and nuclear

It was reported that NEDLAC had completed its work on the energy renewables and nuclear energy reports and these would be submitted to cabinet shortly.

The final report of the working group, Aphane said, would give its view on the finances of Eskom itself including the impact on Eskom’s existing debt instruments; the matter of Eskom’s credit rating; Eskom’s ability to raise finance in the future and the state’s ability to fund Eskom going forward.

Opposition MPs stated that any loss of benefits by Eskom would surely be countered by gains in the formation of a new TSO and they felt that the deep concerns of Eskom regarding credit rating agency opinions were somewhat over-rated in it’s chase to secure a healthy balance sheet.

EIUG says review of Eskom strategy necessary….

Mike Rossouw, chairman of South Africa’s Energy Intensive User Group (EIUG), says South Africa has reach a “tipping point” in terms of electricity prices and that not enough attention is being given by government to the potential effect of damage to productive sectors of the economy with consequent risk of demand contraction and revenue collapse.

Writing in the Business Day, Rossouw, who represents major groupings of large power consumers such as paper and pulp, motor vehicle and steel manufacturers, called for a review to consider urgently new technology innovation in power sources; the validity of a substantial, expensive and inflexible nuclear programme and much more investigation into alternative fuel options such as gas.

Casualties ahead

EIUG stated it represents some 44% of the total electricity demand in South Africa and Rossouw complained that already the country has had to watch its ferrochrome industry lose its place as world leader to China in the last few years because of “global ineffectiveness on the electricity pricing issue”.

Foundries are shutting down, he said, and he blamed government for its lack of “an holistic approach in dealing with Eskom’s price application.” He said that South Africa “cannot afford to get this one wrong” and called for NERSA and the minister of energy to take into account an investment and operating climate that should have more regulatory certainty.

”Government through NERSA must extend affordability to industry on power issues and accordingly the state must re-think its position on the effects of Eskom’s 16% hike per year for five years on the economy”, he said.

Looking back

Rossouw noted that the Eskom application will take the price of electricity “to about 128c/kWhr, an overall increase of a huge 540% over a 10-year period to 2017 with prices have already increased by some 200 % since 2007.

“Electricity cannot be treated as a source of revenue nor as a vehicle that allows municipalities to recover their losses”, he said. “10% increase is a figure that is enough to allow Eskom to continue viable operations”.

Calling for less “bulking up of Eskom’s balance sheet to meet rating agency expectations”, Rossouw stated that Eskom’s MYPD(3) application to NERSA contains only “limited disclosure” but, nevertheless, NERSA, he says, does in fact have access to the full story and maintained that the regulator should react by balancing affordability against the Eskom capital expansion programme.

In the article, he repeated the call that much that much more attention should be given by DOE to what appears to be a “highly inflexible nuclear power generation programme” and “more investigation carried out into alternative fuel options such as gas.”

For weeks now Parliament has been listening to a litany of warnings from Brian Dames, CEO of Eskom, and Paul O’Flaherty, financial director, on the necessity to maintain a rock solid balance sheet to the outside world, particularly the banking and loan sector, in order to secure and maintain loans by Eskom subject to favourable considerations by the rating agencies.

This is important, they say, in order to ensure electricity rates at a revised figure, carved down from what was originally asked for to a much lesser 16% increase per year for five years and which is now proposed to the national energy regulator (NERSA), supported by the department of energy (DOE).

The whole application is termed the third of the multi-year price determinations known as (MYPD(3), given the love of acronyms in the energy world but not so loved it seems during the hearings being conducted by NERSA around the country.

In fact, the deep distrust of Eskom and the possibility that they are not working in the national interest of the consumer but rather their own has become almost a theme of those taking the podium to express their displeasure at constantly increasing electricity prices.

It all goes back to a simple question asked by an MP in Parliament during the explanation given by Eskom to the energy portfolio committee on the reasons for their MYPD(3) application. “Why”, asked the MP, “did Eskom on the one hand try and run its business like a commercial giant when in fact it is a state utility providing a service to the consumer and presumably not trying to make a profit at the expense of the consumer?”

The retort from Eskom was that any failure to get loans without a strong balance sheet would result in even higher electricity rates. But is this really true many have asked during the current NERSA hearings. Is it a question of credit agency ratings or the need to show profits that is driving the Eskom bid for 16% increase at least per year?

Energy Intensive Users Group who are responsible for 44% of electricity consumption say that in their calculations, Eskom needs only 10% at most.

In Cape Town, National Union of Miners said succinctly, “Consumers should not be punished for policies of the past and NUM questioned whether a “R46bn shareholder return was justifiable for a state company.”

In reality, there is no doubt that Eskom does not consider itself a state utility, or at least it certainly does not act like one. A reading of their website quickly clears up any doubt on that issue, the language of the site painting a solid picture of competence and financial strength to the world in general.

In fact the financial problem for the country is what can the foundries that are going insolvent, the struggling businesses facing imponderables and the ordinary citizen facing unheard of monthly municipal accounts, do about an organisation determined to make the kind of profits that give good sleep to bank managers only.

Quite clearly, this scenario will have to be played out before Budget day.

++++++++++++++++++++++++++++++++++++++++++++++++++

With Parliament now open, parliamentarians already at work in some of the committees and training in progress for the new MPs, the State of Nation Address is now scheduled for 14 February, followed by a week of debate, the President’s response being on the 21 February and the Budget set for 27 February.

Parliament of South Africa 20.12.2012

This is a public participation, non-profit site. Please contribute by using our blog follow e-mail address, comment facilities, Facebook or Twitter to advise of any useful, informative, correctional, or interesting and associated information. Editor retains the right to use or publish.

Metros confirm adherence to NERSA rules….

In an important meeting with the portfolio committee on trade and industry under the chairmanship of Bheki Radebe, South African Local Government Association (SALGA) gave its views on recent and forthcoming hikes on electricity tariffs and confirmed that none of the major metros, constituting more than 80% of municipal electricity distribution, ever imposed tariffs that had not been approved by NERSA, the regulator.

Although it was acknowledged that there could be isolated cases of smaller municipalities not complying with this principle, Mthobeli Kolisa, executive director, municipal infrastructure services, SALGA, said there was an overlap between the provisions of the Electricity Regulation Act dealing specifically with tariffs charged by its licensees and the Municipal Finance Management Act dealing generally with municipal tariffs but any problems and most conflicts were overlooked in the national interest.

NERSA’s word was final, he said.

Local government reports for three major cities

SALGA, with input also from representatives of the eThekwini, Ekurhuleni and Johannesburg Metros, briefed the committee on the breakdown of municipal electricity tariff charges. When determining the municipal increases, in line with the NERSA guidelines, the municipalities would take into account the costs of bulk purchases, repairs and maintenance, salaries, interest charges and other cost, and then would have to justify their requests for increases to NERSA, Kolisa said for SALGA.

eThekwini municipality said that electricity purchases made up the largest percentage of the budget of the metro. For a municipality whose electricity purchases constituted 64% of its budget, Eskom would charge a percentage increase of 13.5%. This would contribute 8.6% to the total average increase of 11%, which was a direct pass-through cost for the municipality.

They said that even if the municipal cost did not go up, the increase would still be 8.6% to the end customer, as a direct result of Eskom’s increase. As a result of the municipal cost increases, a further 2.4% was added onto the total increase for the year, as a result of the increases in salaries and wages, repairs and maintenance amongst other cost items.

Sticking to the rules, they say

City of Ekurhuleni said that when Eskom was running short on generation capacity, which happened during the winter months of June, July and August, there was a strong signal during peak hours and although it might cause customers to complain, municipalities would not work against the national objective.

They said that an analysis of the Eskom “Megaflex” tariff indicated that energy was 90% of the cost in Ekurhuleni and demand constituted 10%, with the mark-up at zero (as Eskom was the baseline tariff for a municipality). The Tshwane tariff, on the other hand, indicated that energy was 62% of the cost, demand at 38% and mark-up at 9% which was known to be the case..Should Eskom run the lot?

Should Eskom run the lot?

Kolisa commented, in response to a question whether Eskom should distribute all electricity, that cutting municipalities out of the distribution lines and the equation generally would not be feasible. It was still necessary for them to distribute electricity.

They only, and only they, had the infrastructure in place in their areas, he said, and the suggestion of separate re-distribution zones, or REDS, was an issue of the past.

However, municipalities and metros, said SALGA, faced a generalised critical shortage of skills in the engineering sector and were unable to attract and retain specialist skills, particularly since they also faced competition from private industries. The idea of “adopt a municipality” inviting participation by industry was now being promoted to re-gain some of the lost territory.

City of Johannesburg explained that Eskom tariffs to municipalities included a 4,17 c/kWh (cents per kilowatt hour) cross subsidy towards Eskom’s residential customers, and a cross subsidy for electrification in Eskom supply areas (3,59 c/kWh) and said that the general idea of one rate or one tariff would not fit all municipalities mainly because of their disparate size, different services and different demographics.

Hope that independents might make common tariffs possible

City of Johannesburg said the government initiative to establish the ISMO system where Eskom and municipal distributors would be treated as peers and all distributors would be purchasing from the ISMO at wholesale rates would make some form of tariff alignment possible. But this was well into the future.

SALGA said that a tariff design plan was in process by the five main metros which took into consideration the principles of the cost of supply and this co-operation accounted for the current compliance. Metropolitan distributors and a significant portion of the larger municipal distributors, it was said, were working towards detailed cost-of-supply analysis.

In conclusion, SALGA noted that it might be possible to set a uniform tariff structure but such a move to make it viable would require financing. Generally, part of the problem, it was said, was that there was a strong need to move towards more advanced technology.

Inevitable coal question

In reference to the control of cost inputs in energy supply, SALGA said it was interesting to note that China relied on coal that it imported at very low cost and countries like South Africa were exporting to China at cheap prices to get their business. Local government could not regulate on such issues as coal exports, which were an issue for debate at Eskom and national level, but SALGA could see perfectly well what some of the problems were.

SALGA finally noted that education campaigns to promote energy efficiency were not as effective in the field as they might be and SALGA would work with the Department of Energy to try to correct this.

Eskom stands by its MYPD3 asking price…….

Brian Dames, CEO, Eskom, on their Multi-Year Price Determination (MYPD 3) application to the National Energy Regulator of South Africa (NERSA), told parliamentarians of the trade and industry portfolio committee that price increases were necessary. He said that on one hand they had to have a respectable balance sheet to obtain development money whilst on the other hand, Eskom was coming from a background where investment activity had been inactive over the years.

“To keep the lights on”, Dames said, “there is now a cost.”

Electricity currently below cost

He said that because of historical reasons, electricity was currently charged at below cost-reflective levels and was not sustainable. Electricity prices needed now to have a “transition to cost-reflective levels to support a sustainable electricity industry that had resources to maintain operations and build new generating capacity, guaranteeing future security of supply.”

Dames said that Eskom had also recently issued an “interim integrated report” for the six months ended 30 September 2012 setting out a contextual review of the company’s overall performance from 1 April 2012 and in the light of this had presented the NERSA application.

He said that the current MYPD 2 was ending and consequently Eskom had to submit such an application to NERSA to determine the country’s electricity price adjustment for 2013/14.

However, this time Eskom was proposing a five-year determination for MYPD 3, running from 1 April 2013 to 31 March 2018, which would ensure a more gradual and predictable price path for households, businesses, investors and the country as a whole.

Eskom’s five-year revenue request translated into average electricity price increases of 13% a year for Eskom’s own needs, plus 3% to support the introduction of Independent Power Producers (IPPs), giving a total of 16%, representing a total price increase from the current 61 cents per kilowatt-hour (c/kWh) in 2012/13 to 128c/kW h in 2017/18.

Balance sought between needs of Eskom and poor

The impact of the price increase on the economy had been considered in addition to guidance from the President’s State of the Nation Address in which he requested Eskom to consider a price path which would ensure that Eskom and the industry remained financially viable and sustainable, but which remained affordable especially for the poor. Dames said he believed that Eskom’s application achieved an appropriate balance.

In addressing the impact of price increases, Dames said that Eskom believed that poor households should be protected from the impact of electricity price increases through targeted, transparent cross-subsidisation in accordance with a national cross-subsidy framework.

A failure to achieve cost-reflective prices would sooner rather than later impact on South Africa’s economy and its growth prospects, he said.

MPs query what electricity giant has as objective

A number of opposition MPs disagreed and queried the entire cost-reflective process used by Eskom, saying that the tariffs proposed by Eskom rather posed a dangerous threat to economic growth and the future of business in South Africa, as well as job creation.

Whilst Eskom wanted a 4% targeted return in the medium term and 8% in the final year, they said, JSE majors had returned on average 6.6% per year in the last ten years. They asked if Eskom was attempting to build a balance sheet that compared with global corporates just in order to get loans.

The main thrust of certain opposition MPs queries was the sacrifice in growth rate, damage to business development, to job creation. ANC MPs complained of the effect on the poor.

Paul O’Flaherty, finance director at Eskom, said that the only sources of funding available to Eskom were debt; equity injected from Government and operating profit from its revenue. Eskom had requested for an additional equity injection from the state but that was not forthcoming leaving generation of debt to them and raising enough operating profits from its revenue.

He said in terms of depreciation factors on the figures shown, such was regulated by Nersa and that there was no way of getting around the fact that Eskom had to pay its way. According to the cash flow predictions, a trillion rand of revenue would be needed to pay for primary energy costs, employee costs and demand side management, repairs and maintenance.

Eskom must be seen as viable entity for capital programmes

Eskom’s capital program over the next five years included finishing the Kusile power station repayments, plus a further R360bn in debts, which meant that R200bn had to be raised from the market. This had to be done against a successful balance sheet. Eskom got investment status because of Government uplifting, he said. It had to show its cash metrics were moving towards a more sustainable company, he said.

Dames added that Eskom required on its equity a higher return than the sovereign because of the risk involved and in terms of the cost of debt in a normal environment and that the cost of Eskom borrowing was more expensive that the sovereign borrowing. The cost of debt had been arrived at by Eskom working with NERSA as well by as KPMG and the costs included in the MYPD 3 application were appropriate, in his opinion.

Mohamed Adam the legal representative at Eskom said on questions relating to the impact of price increases on the manufacturing sector, that the impact of price increase on the economy had been considered in addition to ensuring that both Eskom and the industry remained financially viable and sustainable, but which remained affordable especially for the poor. There was a threshold at which Eskom would also face which amounted to a tipping point if prices were too low.

Unbundling of Eskom not an option

In conclusion, Mr Dames said that the submission of the MYPD 3 application was the beginning of a public process and he rejected MPs suggestions that Eskom was a monopoly that should be broken up. He said that any unbundling of Eskom accompanied by the introduction of private participants would fail to bring in lower prices since higher returns would be needed by private generators and distributors.

As to whether Eskom would be willing to supply certain municipal customers, Dames said that local authorities had a constitutional right to supply the customer within their jurisdiction and Eskom was unable to supply a number of municipal customers anyway based on their relation to the network. Also municipalities would lose revenue.

Dames said that the growth rates in the MYPD 3 submissions were lower than those required in the New Growth Path and the National Development Plan and whilst the energy reserve margin might be held in the immediate future, it would disappear if new generation capacity was not brought on line after the completion of Kusile and if there was growth. The current build programme did not address all the capacity needs of South Africa into the future.

EIUG figures do not reflect current picture

Dames, in addressing the claim by Energy Intensive Users Group (EIUG) that Eskom’s costs of maintenance were higher than they should be, said a considerable quantity of EUIG’s comments were based on inaccurate figures.

Much in the way of numbers quoted by EIUG were based upon “aspirational targets achieved during the 1990s when Eskom’s power stations were a lot younger”, it was said. The constrained power system now existing did not now allow for such philosophical assumptions. There was a balance which Eskom now needed to strike in practical realities as far as keeping the lights on was concerned.

Manufactured goods industries struggling with rising costs.

Manufacturing Circle, CEO, Bruce Strong, told parliament that with electricity costs increasing 170% in five years but other BRICS countries decreasing such as Brazil by 28%, the SA purchasing managers index was at a three year low with a volatile rand exchange rate bring uncertainty to any investment plans. Electricity charges had to have a more gradual cost increase trajectory, he said, or there was serious trouble ahead.

Worse, municipal charges had no relation to Eskom charges and this had to be attended to, Strong added.

His statements came in hearings on the department of trade’s (DTI) industrial policy action plan (IPAP) and Strong added his voice to that of MPs that the National Energy Regulator of South Africa (NERSA) should interrogate Eskom price increases more harshly; that municipal mark-ups should be investigated and that electricity discounts had to be considered if manufacturers were to survive.

On the first day, much of the debate surrounding the progress report by DTI on IPAP progress to date. The debate surrounded not only the usual discourse on tariffs, government departmental policy on preferential procurement (PPPFA) but on re-orientating South African exports away from traditional markets to high growth countries.

A noticeable shift to open discussion on South Africa’s port and harbour problems was very much discernible, other than the expected focus on electricity charges.

DTI’s acting deputy DDG for industrial development, Garth Strachan, told parliamentarians that the need to maintain lower port handling fees was at the moment much countered by high financing costs of port infrastructure development, particularly in the area of rail. Transnet could not disassociate its charges from the urgent need to re-equip in areas of dockside upgrading and rail facilities.

He admitted that South African port charges were amongst the highest in the world, well above global norms particularly on manufactured goods but nevertheless port pricing on iron ore and coal was below the global average. Transnet was deeply involved in increasing flow with new rolling stock which fact was welcomed by opposition members

DTI in their presentation pointed specifically to the renewable energy independent power producer procurement (REIPPP) programme where two rounds of renewable energy generation bids had been awarded with minimum levels of local content ranging from 25% to 45%.

“Green industry achievements included the IDC approval of funding of solar water heater manufacturing and the launch of the energy efficiency programme, DTI said.

Clothing, textiles, leather and footwear, canned vegetables, set top boxes and pharmaceutical products had been the subject of PPPFA revision, it was noted, and new designations for school and office furniture and cables and other capital equipment was in the pipeline. Strachan said the industrial participation programme (NIPP) was just about to be re-formulated which would “help the shift to direct offsets in key IPAP sectors” now that the NIPP policy review had been completed.

On financing, Strachan said IDC was also going to lower the cost of funding for businesses, by sourcing an additional R2 billion from the UIF for funding more labour intensive businesses and so far, IDC had claimed that jobs created or saved through funding approvals from 2009 to this year was well over 111,000.

Looking ahead with the protracted recession and slow demand for South Africa’s exports, the challenge was the exchange rate overvaluation and volatility with high relative real interest rates. Strachan said that the “user pay” principle for funding electricity build programmes was inducing massive economic shocks to the manufacturing sector.

There was also the challenge of pricing by monopolies in primary industry and supply of intermediate inputs into manufacturing. In response to questioning on breaking this control up, Strachan responded by stating that the role of large companies in manufacturing in terms of demand and supply in a relatively small to medium economy was significant and that small enterprises in most cases benefitted from the value chain.

This was bearing in mind that the capital costs of such projects were so huge that it was an unlikely small and medium businesses would proliferate under these conditions.

Over the following two days, hearings on the IPAP were conducted and interesting comment was received from the Manufacturing Circle, made up of a number of South Africa’s major medium to large manufacturing companies from a wide range of industries, some of them exporters.

Bruce Strong, CEO of Manufacturing Circle told parliamentarians that for a sector that employed some 1.7m people and accounted for 15% of GDP it was not good that the sector was stagnant and had lost 300 000 jobs because of the recession.

Municipal electricity charges did not reflect the Eskom’s price increases and it was required that NERSA had to be more aggressive on Eskom price increases. Control was required on municipal electricity price increases in particular. Generally he said, the resources of independent regulators had to be upgraded and a benchmarking analysis of their abilities looked at.

Strong called for a national “fiscal review” on the funding of public infrastructure projects. His circle of companies had responded to various of DTI’s incentive programmes but no successful application by manufacturers to the jobs fund had been reported.

There was a crisis in manufacturing, Strong said.

The Competition Commission in their submission, added IPAP did not seem to support the establishment of a sufficient number of small and medium businesses and the problem as they saw it was that “large firms or monopolies ‘owned’ their customers and spawned low levels of investment as there was no need to invest because there was no rivalry. MPs added the point that legislated monopolies seemed to be shutting down the economy.

DTI responded that indeed the “ bunched up” escalation in electricity price increases was hurting the manufacturing sector. But the emphasis on the supply side and Eskom’s build programme that had led to the original Multi Year Price Determinations of a 27% increase, with municipal customers being subjected to tariff loading had led to triple digit non-tariff surcharges.

Some municipalities appeared to be using electricity tariffs to generate revenue, Strachan said and Strong noted that places in Mpumalanga that were served by Eskom had electricity 20% cheaper than those served by the majors. MPs added the point that in some cases, for example Johannesburg and Tshwane, a charge of 700% above Eskom’s prices was made.

DTI recommended that an intra-governmental task team examine the impact of escalating electricity tariff increases; short term measures be applied to vulnerable sectors; there was a need for one national set of tariffs; there should be single digit price increases; carbon taxes be approached with caution in the current climate; and companies be supported in recapitalising with energy efficient technologies.

MPs commented at this stage that it appeared that radical responses were needed to be done or IPAP would become a welfare system for failed businesses and pointed again to “ridiculous” electricity surcharges imposed by some by municipalities. Such a discourse by DTI was needed.

DTI’s main platform however on the issue of a deteriorating situation was the economic situation resulting from the global recession, rather pointing to the fact that although government automotive investment programmes had been successful, the production of cars had been seriously affected by the international failing markets. Exports to the European Union remained negatively affected and there had been an increase in vehicle imports at the same time.

Strachan said that 80% of the bodies of medium and heavy commercial vehicles now have to be assembled in South Africa, with the drive train and engines to be shortly included. DTI was extending investment support for the assembly of semi knocked down vehicles, he said, and was working with IDC on finance programmes trucks and buses but the market was, nevertheless, small.

The department said the clothing and textiles sector accounted for 120 000 jobs and 11% of manufacturing employment. The sector had a turnover of R35bn which was 2.8% of GDP and there were 2 000 active companies in the sector. While the production in clothing had declined, there had been an increase in the production of footwear.

DTI pointed to the fact that many of the MPs questions and answers in the business hearings were outside of DTI”s function or core business but it could see the danger it posed and recalled that there had been the stalled REDs initiative to secure efficient distribution of electricity.

Looking ahead, Strachan said shale gas whilst not in DTI’s sphere, it seemed quite obvious that the east and west coasts of Africa contained enormous opportunities for the oil and gas industries and also South Africa had a competitive advantage because of its mining history. South Africa should focus on localization and the lifting of constraints at ports accordingly, it was noted.

Strachan noted that there was an opportunity for Saldanha to be an oil and gas hub but progress had been slow. If shale gas became a reality it would double the potential of Saldanha.

annual report 2011/12

Eskom, whilst it may have some problems, is in a very healthy position and has electrified more than 155,000 homes this year. It has, as promised, “kept the lights on” in South Africa but would fail in its New Build programme unless it had the backing of government financial support.

This was stated to the public enterprises portfolio committee in Parliament by CEO Brian Dames when presenting to Parliament the Eskom 2011/2 annual report figures in a presentation to back up the published annual report and financial statements.

He said that any funding issues had been resolved, particularly as far as funding for future projects was concerned, as had labour problems at Medupi power station building site.

Dames said that although sales had increased only by a marginal 0,2%, the increase in tariff allowed had resulted in revenue growing from R91.4bn in 2010-11 to R114.7bn in 2011-12. Since March, there had actually been a decline in sales, reflecting the impact which the world recession was having on the South African economy.

Profit amounted to R13.248bn, giving a 3,7% return on average total assets, mainly as a result of NERSA having approved a 16% increase, providing therefore an economic benefit of R11bn this year to the country’s coffers.

Paul O’Flaherty, financial director, compared the final results to NERSA’s targets for 2011/12. NERSA had estimated a higher operating profit than eventually emerged. The lesser figure came about because of a reduction in sales due to a depressed economy but with cost savings of over R4bn, a net profit figure of R13.25bn was finally reflected in the figures which exceeded NERSA’s expectations.

O’Flaherty, however, gave some warning signals for the coming year as far as the consumer was concerned, bearing in mind that the utility had originally applied to NERSA for a 29% hike in tariffs in order to fund its power generating programme over what was then a shorter period.

He told committee members that as coal were such a large proportion of Eskom’s costs and with coal prices being unpredictable, inputs at their coal fired power generating stations could easily rise above the rate of inflation and in such as case the consumer would have to bear the brunt.

As things stood, coal costs had gone up by 29% during the year. He also said that Eskom had finally negotiated an increase of 8,1% for the workforce and this would add to input costs throughout the group.

Brian Dames said that a major issue in the coming year was to convert coal deliveries from road to rail as far as this was possible and Eskom had set a target last year earlier to move 8,2m tons by rail. So far, Eskom was looking at a figure of 8,5m tons having been achieved. This was encouraging, he said.

Dames told parliamentarians that the special tariffs enjoyed by BHP Billiton for their aluminium-smelter, originally set when Eskom had excess capacity were currently under negotiation. Eskom had also recently been able to renegotiate more favourable contracts with zinc plants in Namibia who had until now enjoyed tariffs below cost of production.

He warned that as tariffs inevitably increased, such would be translated into debt problems, particularly at municipal level. Already it was a challenge was to manage the Soweto debt, which stood about R4.5bn at the end of the last financial year.

Dames said that NERSA had agreed, as part of recent talks, that Eskom would be allowed price increases in the future and would also be allowed to revalue its assets to allow for a higher level of depreciation. The cost of replacing Eskom’s assets today would be R500bn, compared to the historical cost of R290bn but as its debt grew, so would its financing costs.

Eskom’s rating with government support was “BBB+” and without government backing its rating would be lower. This was not a possible scenario, he said, for the country or Eskom.

Eskom’s build programme would continue as planned, the committee was told, which would deliver an additional 11 256MW by the time the Kusile coal fired power station came on stream in 2019. What would happen after that, Dames said, depended entirely on the integrated resource plan (IRP) being drawn up by the department of energy (DOE) in discussion with stakeholders.

Both DOE and Eskom are locked into investigative debate on the financial prospects for Eskom should it be stripped of the national transmission grid in order that independent power producers may enter the energy supply chain, all regulated by the presently halted ISMO Bill. Such matters directly affect the IRP and all future consequences in energy planning.

In a presentation before the select committee on economic affairs, the national electricity regulator (NERSA) presented an overall view of its performance for the last year, stating one of its biggest challenges lay in the petroleum pipelines area because of different authority in various aspects of the supply chain which compromised regulatory oversight. The cost of the pipeline was most recently estimated at R23.4bn.

Ms Esther Viljoen of the strategic planning and monitoring division, NERSA, said the security of supply of petroleum to the inland areas was difficult at times as a result of too many non-state players in the structure. Another problem, she said, was that some of the revenue from tariffs was being deployed in some state-owned entities for capital expansion.

In the electricity regulatory area, Viljoen said 177 municipal tariffs were approved and, as all knew, a revised tariff increase for Eskom of 16% instead of the originally approved tariff of 25.9% was approved for 2012/13. A determination was also made on the procurement renewable energy.

In piped-gas industry regulation, Viljoen said a methodology had been set up for maximum prices for piped gas and stakeholder workshops held to explain the new calculations. Five licences for the construction of gas transmission facilities; two licences for the construction of gas distribution facilities; two operation licences; and one trading licence were granted.

In the petroleum pipelines industry regulation, NERSA approved, she said, an increase of 31.58% in allowable revenue for Transnet for 2012/13 and approved storage facility tariffs for nine licensees. It further approved three construction licences and one operational licence, while revoking eight licences from Chevron.

Challenges in the piped-gas industry regulation were certain piped-gas activities not in the Gas Act; Sasol’s non-compliance in certain areas of supply and, thirdly, off-take agreements in the private sector had been a problem. Viljoen also mentioned the failure to act decisively over fracking in the Karoo, with cabinet deciding to suspend exploration resulting in Sasol going overseas to Canada and Shell still awaiting results on its prospecting ability.

NERSA said it was aware of the escalations in costs and the delays in the construction of the new pipeline infrastructure and would monitor this and facilitate the entry of BEE entrepreneurs into the exercise

In response to a question from chairperson Freddie Adams who said that he understood that foreign refineries were superior to South African refineries and that pricing was putting South African refineries outside of the market, Thembani Bukula of NERSA replied that NERSA did not regulate the pricing or the refineries in that it only regulated the pipeline that moved petroleum from the coast inland and to the storage facilities. To improve regulation of the petroleum industry, Bukula said the state would have to provide NERSA with full regulatory powers on the entire value chain.

In response to the questions regarding the industry’s monopolistic environment, Mbulelo Ncetezo, NERSA’s electricity regulation manager, said that Eskom’s current monopoly arose from the market structure that the government policy had set up. As such, this issue must be decided by the government, and was nothing NERSA could do to address the core issue of the market structure.

Thabo Ramanamane, NERSA head of petroleum licensing, said on petroleum products the problem was one of dominance by the major petroleum companies in a situation where South Africa imported around 40-50% of its petroleum and the new pipeline was connected to a storage owned by the private sector.

Whilst therefore the pipeline was a common carrier, which accommodated everybody’s needs with access proportionate amounts, storage facilities on availability under the control of others, presented a challenge for regulatory purposes.

At this point an argument developed with MPs on the future of supplies from shale gas changing the entire picture but Ramanamane said NERSA had not pronounced itself for or against Shell gas exploration in the Karoo, Viljoen adding that the consequences that flowed from the associated regulatory uncertainty had produced strategic planning difficulties.

Mr Ramanamane said the new infrastructure plan in hand would benefit the petroleum side by decreasing transportation by road and switching to pipeline or rail transportation from road.

The tone was set for a three day series of public hearings amounting to a public workshop on the electricity distribution industry (EDI) when department of energy (DoE) confirmed that the rehabilitation of the industry needed R27.4bn to reverse a downward delivery spiral, bearing in mind the need for skills generally and the inability of municipalities to execute to deliver in terms of strategy.

However, the main players in the industry, including Eskom, were convinced that South Africa had the skills and ability to effect proper change.

Willie de Beer of Sanedi opened the meeting and warned that unless there was a satisfactory distribution and supply system, any amount of power stations and electricity generation programmes would be pointless if the electrical distribution industry, one of the largest employers in the country, did not revolutionize itself from within and carry out an overhaul.

The entire industry needed to be re-configured, he said, and the whole issue of the current developmental restraints facing the country needed to be looked at.

Firm management and leadership remained a key need, with effective controls in the revenue cycle being an essential requirement. Consolidated funding schemes for all parties, large and small, who are participants in the industry, had to be set up enabling the industry as whole to catch up technologically, de Beer said.

“It is within South Africa’s ability to carry out such an exercise”, he said, and added that the country “had the necessary years of experience and the people present to succeed.”

Prof. Nic Beute of Cape Peninsula University said a survey conducted on the EDI indicated that most planning had been done to develop the industry when the regional electricity distributor (RED) areas plan was mooted and the major requirement was then only the initiative to act and provide the finance and technological knowhow at lower levels at municipal distribution points to take the path forward.

Prof. Beute concluded by observing that DoE appeared to be “stuck in an analysis mode” and what was needed was a financial plan involving National Treasury and possibly Development Bank of South Africa (DBSA) to meet an already defined path and for them to come forward with the wherewithal to make past planning during the REDS exercise a reality. Little had changed, he said, except time had been lost.

Ongama Mahlawe of the dept. of co-operative governance and traditional affairs (COGTA) said much of the problem lay with rural municipalities who had the biggest backlogs: the highest degree of finance gaps; lowest technical ability and were unable to attract and retain skilled personnel.

This was unlikely to change unless the economic picture changed, he said. “We have a situation where R49bn of the uncollected R76bn in rates taxes, including electricity fees, is owed by households.”

“With government deciding not to implement the REDs plan, Eskom remains servicing 46% of domestic customers, which revenue is lost to municipalities in any case.” Last year, he said, only a certain number of municipalities had adequate budgets and maintenance came under the heading of discretionary expenditure.

GOGTA had, in the meanwhile, established a dedicated unit focusing on supporting municipalities on energy matters and had prioritised 108 “low capacity” municipalities. Under questioning, Mahlawe confirmed that no practical implementation had yet been carried out.

In an initial paper, DoE reminded all parties to the hearings of the legislative environment which stated that a municipality has the executive authority in respect of and has the right to administer local government matters regarding electricity and gas matters and that only NERSA could issue licences for the operation of generation, transmission or distribution facilities……and regulate prices and tariffs.

Ayanda Noah, head of distribution at Eskom said Eskom had adapted itself after the shutdown of the REDs approach. It currently had 311,831km of reticulation lines, 47 509km of distribution lines and 11 415km of underground cables and was working with a number of smaller municipalities’.

The group, she said, had broken itself into nine provincial offices and the record was that over the years since 1991, Eskom was now providing electrification to 4 million homes throughout South Africa since the inception of the electrification programme.

Going through a long list of problems that exist at municipal levels and despite their instituting recently a successful “adopt a municipality” programme, Noah said that industry issues hampered Eskom’s ability to maintain and upgrade its own infrastructure programme given the wider industry issues and the many problems at national level, all of which eventually translated into major risk factors for Eskom.

She said that an approach had to be adopted, nevertheless, where Eskom had to consider its own interests as suspended and the national industry to dominate, she said. An approach had to be found where “the industry heals from within”, she commented. In Eskom’s view, transfer of assets was a last resort measure, Noah said

Looking back, the act of creating REDs Noah said this concept would not have really solved any of the underlying problems facing the industry. The answer, she said may lie in “active partnering” such as was being instituted by Eskom and now being carried out with municipalities, since there were in fact only two players in the industry who could participate in the restructuring physically, that was Eskom and the municipalities themselves.

“Active partnering” was in her view a non-threatening approach, as opposed to the trauma of forced intervention to address service delivery issues. “There is no need for the industry to become paralysed since the answers lies within the industry itself”, she concluded.

NERSA, the electricity regulator, called for an alignment of financial year ends between all municipalities and the state departments involved: a central data system to gather all matters involved in generation, transmission and distribution and a multi-party agreement between state departments and all municipalities on compliance and audit issues.

DBSA said it had “huge” exposure to the electricity industry, particularly distribution, amounting to some R5bn. It called improved revenue collection and suggested pre-paid meters; that all revenue from electricity sales be “ring fenced” for maintenance and transparent tendering processes instituted with centralised controls.

Renewable energy sources as an alternative had to be focused on, DBSA said, and tariff structuring by municipalities needed to be reflective of the long-term picture in order to attract investment.

The present picture was “characterised by many of the municipalities having insufficient infrastructure to deliver energy services and a deteriorating quality of supply due to ageing equipment which required rehabilitation or replacement.

They quoted Dr W de Beer of Sanedi who had pointed out the fact that the infrastructure backlog is moving from not only a need for R27bn for maintenance but complicated an annual growth need of R2.5bn per year.

Capacity and skills in municipalities had to be strengthened by participation with a government programme, DBSA said. This must urgently involve a DoE-led rehabilitation plan of an immediate pilot programme; a project finance agreement for municipalities and the involvement of a detailed funding model between DBSA and National Treasury with COGTA, NERSA, department of public enterprises and DoE itself. A formal financing programme should be commenced at the soonest.

The South African Local Government Association echoed this call, pointing to the debilitating effect of electricity theft in informal townships and the need for meters to be installed on a user-pay basis in all households. SALGA said a “transmission group|” should be formed as a public resource to bring all stakeholders together and new electricity management systems by municipalities “conceptualised” immediately.

Not all municipalities were failing they said, and the plan called “ADAM” (whereby municipalities were re-capitalised on the basis that there was certainty in the future of any investment in them) should be re-vitalised and adopted with strong leadership from central government and the support of National Treasury.

A National Treasury spokesperson, in their paper, referred to the constitutional right of municipalities to apply surcharges in the form of a tariff base plus “a reasonable rate of return”. A portion of this had to be set aside for repairs and maintenance (R&M), they said, but it was not prudent for government to legislate on the whole of the surcharge in the light of the law and also its use was known to be an important form of general revenue. Nevertheless, there had to be changes on this critical issue.

Currently, said Treasury, the integrated national electrification programme (INEP) amounting to grants to municipalities to create new connections and was primarily for poor households. The concern was that this was being diverted to refurbishment that could have been avoided if normal maintenance were undertaken.

A way had to be found, said Treasury officials, to ensure that R&M was undertaken on a programmed basis, that skills training programmes were brought to the all municipalities, both large and small and that the profile of the need for constant R&M from the funds generated by the sale of electricity became a high profile issue with both councillors and residents.

In a parliamentary report on the department of energy’s strategic report for the year 2011/2, of which the final recommendations will go to the minister of energy, a call was made for “loopholes” in the Petroleum Products Act to be expedited and to increase funding of both the nuclear regulator (Nersa) and the Nuclear Energy Corporation of South Africa (Necsa).

Both Nersa and Necsa had drawn attention in their annual budget vote presentations earlier to Parliament on the general shortage of funds appropriated in terms of Pravin Gordhan’s 2012/3 budget, Nersa complaining that their budget was so insufficiently funded as to become a “danger to South Africa”.

On the subject of Nersa, the final page of the committee’s report to the minister states that Nersa should have its “mandate increased” to cover “petroleum pipeline and piped gas” and also to deal with the “deteriorating electricity infrastructure situation”. The report also said that Nersa should involve itself in South Africa’s nuclear build programme, as should Necsa.

In the subject of electricity distribution, recommendations included the necessity of introducing urgently the smart grid plans which became evident during departmental presentations. They drew attention to the SANEDI plan, called by the Central Energy Fund a “Smarter Grid”, which was the integration of two main utility infrastructures in South Africa, the electricity grid and the existing information and the telecommunications infrastructure.

The committee drew the attention of the minister to their concern on the continued reliance on the Sasol pipeline carrying natural gas from Mozambique, asking the minister to note their views that gas exploitation would become a major issue in the development of Southern Africa.

They noted that refinery capacity figures were “very low”, as evidenced by the quantity and volumes being imported, and that storage capacity and infrastructure development in this area was therefore an immediate necessity. On refineries generally, the committee noted the “very encouraging stance” adopted by PetroSA on its own refinery project, “Project Mathombo”.

The committee drew attention to the work of the South African Supplier Development Agency (SASDA) to accelerate progress in the development of black suppliers in terms of BBEEE and economic growth plans of government but said that “Engen, BP, Shell and Chevron have not contributed at all to transformation in the areas where SASDA was involved”.

The recommendations to the minister pointed out that promises were made in terms of the agreements signed “but nothing has happened”. SASDA’s attempts to get the companies on board, “even after engaging their respective CEO’s, had proved fruitless”.

The Minister of Energy, Dipuo Peters, in responding to questions in Parliament on South Africa’s reserve of critical skills in the nuclear energy field said that any retrenchments in this area were in the light of the fact that the Nuclear Energy Corporation (Necsa) had made a commitment to the unions that the retention of critical skills would be a priority, should such retrenchment processes be inevitable.

She said that the department of energy (DoE), in partnership with the department of science and technology (DST), were both investigating possible plans for the retention of skills critical to South Africa’s nuclear build programme.

It became apparent recently that in order to meet the reduced appropriations in the current budget vote there was a pending retrenchment of 250 on the Necsa staff role but the Minister stated in response to the question that the department was working with the DST on a skills strategy for the nuclear programme in order to “balance risks of excess skills and skills shortages”.

In the response to the budget vote, Necsa indicated that it employed 2 179 workers, including 115 scientists, 69 engineers, 430 skilled workers, 328 semi-skilled workers, 139 management staff, 38 unskilled workers and had 23 directors. Earlier this year, as reported by ParlyReport, Necsa chairperson Sisa Njikelana told the parliamentary portfolio committee on energy that insufficient funding for the nuclear body in terms of the 2012/2013 budget vote placed South Africa at risk when it came to nuclear oversight in terms of its mandate. Necsa is set to receive R554m, less than its previous budget.

Parliament, in making its recommendations on the budget vote to the minister as a result of DoE presentations, reminded the minister that in their view both Necsa and the energy regulator, NERSA, were underfunded.

SARS role at border posts being clarified …. In adopting the Border Management Authority (BMA) Bill, Parliament’s Portfolio Committee on Home Affairs agreed with a wording that at all future one-stop border […]